Increasing project value by risk management

Most organizations have more project proposals and ideas than they can realistically base. This means that project groups are competing for project approval and financing. As a result, the project champion often conceals or exaggerates the value of their projects. Teams and organizations generally focus on pre-project costs and expected returns. Other costs are overlapped or ignored indefinitely and risk assessment is treated as a comprehensive post-treatment. This, however, focuses on top costs and net yield only in half the story.

You may have to leave thinking about risk assessment as a killjoy practice that draws the enthusiasm of the project and starts thinking about how to increase the value of a project.

Understanding Funds:

The project's risk is a problem that can lead to some loss or threaten the success of a project1. Risks are different from problems because they point to the future or the adverse consequences.

"Risk is a condition that is not currently true, the likelihood of a condition occurring, and its consequences or impact on the project when the condition is met."

Risk management is the process of identifying, analyzing and managing proactive risks to maximize the positive consequences (opportunities) and minimize negative consequences (losses). Risks are solved by developing mitigating plans designed to reduce the likelihood of a condition being fulfilled and contingency plans designed to meet the condition.

As mentioned above, the value of a project is determined by its net yield and risk. The project's net return is the same as the present value of the project, minus the cost (return = present value – costs). This return ensures that the project continues to be planned and budgeted – that is, a risky project. But projects are seldom risk free. In order to get a real evaluation of the project, the return is assessed against the risks.

Risk Management Application:

Suppose I have a project proposal to unify two corporate databases. I think he will save $ 100,000 in five years and spend $ 80,000. The ROI is $ 20,000 without any risk, but there are risks.

first Due to a certain uncertainty in the requirements, it is 50% probable that the development effort will cost an additional $ 10,000. This refund can be reduced by $ 5,000 ($ 10,000 x .50).

2nd Although the project team is assured of sales that the impact on sales force will not be material, the team believes that there is still a 25% probability that sales will require further training, with changes taking into account changes, which is $ 8,000 goes back with $ 2,000 ($ 8,000 x 25).

3rd Due to the inherent uncertainties associated with the technologies and the direction of the organization and some expected acquisitions, it is 10% probable that the whole project will fail or be replaced by other efforts. This means that ROI will be reduced by $ 8,000 (total cost of the project is HUF 80,000 x 10).

If all risks are taken into account, the rebate drops to $ 5000 + $ 2000 + $ 8,000 or $ 15,000. The return is now $ 20,000 – $ 15,000 or $ 5,000 so the project is considerably less attractive than originally. But managing risks can bring the value of a project to a level that again makes it attractive.

first First, the requirements must be tightened first by verifying the concept or simply by deleting the project until the uncertainties can be eliminated. With this approach, the value of the project can be increased by a $ 5,000 depreciation of the risk of uncertainty.

2nd Sales force can also evaluate the concept to ensure that you do not need training for fear, thereby eliminating the second risk and increasing the value of the project for an additional $ 2000.

3. Finally, although external uncertainties can not be eliminated, mitigating and conditional plans can be introduced to reduce the overall impact of the project value. For example, instead of constructing a project as a complete or neutral proposition, it may be feasible that its parts or stages may be adapted to many different environments. Possibly the data structures and the encoding can be separated from the database implementation so if organizational changes occur that undermine implementation, the data structures can still be used in the organization's highly-anticipated implementation . If you can save one third of the work the project will increase to $ 2,640 ($ 8,000 x .33).

As a result of this risk management, the total amount of refunds will increase to $ 9,640.

After risk management, the value of the project is $ 14,640 (revenue of $ 5,000 after the risk assessment + the full return on risk management).

Conclusion:

The real value of a project can not be evaluated without being realistic about the cost of the business, including the risks involved. Simply recognized and costly costs always reduce the value of the project, encouraging project managers to report overly optimistic outlook, which undermines the reasons for risk assessment. But if risks are actively handled by meeting them, developing contingency and contingency plans and considering risk management as an ongoing process, risks can be minimized. As a result, the value of the project can be increased and the organizations better and consistently understand the value of the project.